Definition
Incentive Wage Plan: An incentive wage plan is a compensation program that ties pay directly to performance. Under this arrangement, wages increase as productivity rises above a predetermined standard. This plan is designed to motivate employees to produce more and work more efficiently.
Incentive wage plans can be categorized into two main types:
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Individual Incentive Wage Plans: These are based on the performance of the individual employee. If an individual surpasses the set productivity standard, their wages will increase proportionally.
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Group Incentive Wage Plans: These are based on the performance of a work group. The increased productivity of the group leads to wage increases for all members, distributed according to each member’s contribution or a pre-established formula.
Examples
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Piece-rate System: An employee is paid a fixed rate for each unit produced or action performed. For example, a factory worker may earn $5 for each assembled widget, with pay rising as more widgets are produced.
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Sales Commission: A salesperson earns a base salary plus a commission for every sale made. If sales exceed a specific target, the commission rate may increase.
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Gainsharing Programs: A manufacturing plant sets a productivity target. If the entire plant meets or exceeds the target, employees receive a bonus proportional to the productivity gains.
Frequently Asked Questions
What is the primary purpose of an incentive wage plan?
The primary purpose of an incentive wage plan is to motivate and reward employees for achieving higher levels of performance and productivity.
Are incentive wage plans only for manual or production-based jobs?
No, incentive wage plans can be tailored for various roles, including administrative, sales, and service positions, wherever performance can be objectively measured.
How are productivity standards set?
Productivity standards are typically established based on historical data, industry standards, or time and motion studies.
Can an incentive wage plan cause unhealthy competition among employees?
It can, which is why many companies use group incentive plans to promote teamwork and collective achievement over individual competition.
Employees receive their base wage, but may not receive additional incentive pay unless they meet or exceed the productivity standards.
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Incentive Pay: A broader term referring to any pay system designed to reward and motivate employees for performance, including bonuses, commissions, and profit-sharing plans.
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Performance-Based Compensation: Compensation tied to individual or group performance metrics, aiming to align employees’ interests with company goals.
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Productivity: The measure of efficiency of production, often quantified as output per unit of input.
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Bonus: Additional compensation given to employees as a reward for achieving targets or exceptional performance.
Online References
Suggested Books for Further Studies
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“Compensation” by George T. Milkovich, Jerry M. Newman, and Barry Gerhart. This comprehensive guide covers various compensation strategies, including incentive wage plans.
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“Strategic Compensation: A Human Resource Management Approach” by Joseph J. Martocchio. This book provides an in-depth look at different compensation systems designed to align with business strategy.
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“Total Rewards: Compensate and Engage” by WorldatWork. This text explores various reward systems, including financial incentives and their impacts on employee motivation.
Fundamentals of Incentive Wage Plan: Compensation Management Basics Quiz
### What is an individual incentive wage plan based on?
- [x] Individual employee’s performance
- [ ] Work group’s performance
- [ ] Company’s annual profits
- [ ] Industry standards
> **Explanation:** An individual incentive wage plan is based on the performance of the individual employee, with wages rising as their productivity increases above the standard.
### What type of incentive wage plan increases productivity for a whole team and distributes extra pay among team members?
- [ ] Individual incentive wage plan
- [x] Group incentive wage plan
- [ ] Commission plan
- [ ] Profit-sharing plan
> **Explanation:** A group incentive wage plan is based on the collective performance of the work group, distributing the pay increase among team members proportionally.
### Which of the following is typically included in a group incentive plan?
- [ ] Secret monthly bonuses
- [x] Productivity targets for the group
- [ ] Performance reviews by board members
- [ ] Unannounced wage increases
> **Explanation:** Group incentive plans generally include productivity targets for the entire group, with bonuses or increased wages when these targets are met or exceeded.
### How are employees generally rewarded in a piece-rate system?
- [ ] Based on hours worked
- [ ] Through a fixed monthly salary
- [ ] Unlike any other system
- [x] Per unit produced or action performed
> **Explanation:** In a piece-rate system, employees are rewarded based on the number of units they produce or actions they perform, linking wages directly to productivity.
### What is the main goal of implementing an incentive wage plan?
- [ ] To reduce the workforce
- [ ] To simplify payroll processes
- [ ] To lower production targets
- [x] To motivate and reward higher levels of productivity
> **Explanation:** The primary goal of an incentive wage plan is to motivate employees to achieve and exceed productivity targets by providing financial incentives.
### How are productivity standards typically set for incentive wage plans?
- [x] Based on historical data, industry standards, or formal studies
- [ ] Arbitrarily by management
- [ ] By employee voting
- [ ] Through annual profit margins
> **Explanation:** Productivity standards are generally set based on historical performance data, industry benchmarks, or detailed time and motion studies.
### Sales commission plans are an example of what type of incentive wage plan?
- [ ] Group incentive wage plan
- [x] Individual incentive wage plan
- [ ] Profit-sharing plan
- [ ] Base wage plus overtime scheme
> **Explanation:** Sales commission plans are a type of individual incentive wage plan where employees receive a commission based on their sales performance.
### Which of the following could be a downside of an individual incentive wage plan?
- [ ] Increased team collaboration
- [x] Unhealthy competition among employees
- [ ] Structured performance reviews
- [ ] Systematic wage levels
> **Explanation:** One potential downside of individual incentive wage plans is that they can lead to unhealthy competition among employees, rather than encouraging teamwork.
### What ensures fairness in a group incentive wage plan?
- [x] Clear performance metrics and fair distribution formulas
- [ ] Random assignment of bonuses
- [ ] High base salaries
- [ ] Equal pay for all regardless of contribution
> **Explanation:** Fairness in a group incentive wage plan is ensured by clear, measurable performance metrics and a transparent formula for distributing incentives based on individual contributions.
### Who benefits directly from attributes beyond set productivity thresholds in incentive wage plans?
- [ ] Only top executives
- [ ] Customers
- [ ] Suppliers
- [x] Employees
> **Explanation:** Employees benefit directly from producing beyond the set productivity thresholds in an incentive wage plan as they receive increased wages or bonuses.
